Rather than multiple choice, let’s fill-in the blank. The answers that you can choose are: Interest Rate Parity, Foreign Exchange Expectations, Uncovered Interest Rate Parity, International Fisher, and relative purchasing power parity. Pardon the departure from multiple choice. Q1 - The forward discount/premium is equal to the expected exchange rate movement references… Q2 - Exchange rate movement should exactly offset any inflation differential. We can not expect this to hold precisely. This references… Q3 - The interest rate differential is expected to be offset by currency depreciation and references… Q4 - The forward disc/premium equals the interest rate differential. This must hold otherwise there is an arbitrage. References… Q5 - Which parity relationship from the list above is not addressed in any of these?
Q1 - The forward discount/premium is equal to the expected exchange rate movement references… Foreign Exchange Expectations Q2 - Exchange rate movement should exactly offset any inflation differential. We can not expect this to hold precisely. This references… relative purchasing power parity Q3 - The interest rate differential is expected to be offset by currency depreciation and references… Interest Rate Parity Q4 - The forward disc/premium equals the interest rate differential. This must hold otherwise there is an arbitrage. References… Uncovered Interest Rate Parity Q5 - Which parity relationship from the list above is not addressed in any of these? Fisher T/G
- FEE 2. PPP 3. IRP 4. UIRP 5. IF
What is the International Fisher parity? And I get the same as chadtap
International Fisher assumes real interest rates are equal across borders, so interst differential equals expected inflation differential [1 + r (fc)] / [1 + r (dc)] = [1 + i (fc)] / [1 + i (dc)]
^ Int’l Fisher is (1+Rfc)/(1+Rdc) = (1+Ifc)/(1+Idc)
- forex expectations 2. PPP 3. fisher 4. interest rate parity 5. uncovered interest rate parity
chadtap Wrote: ------------------------------------------------------- > International Fisher assumes real interest rates > are equal across borders, so interst differential > equals expected inflation differential > > [1 + r (fc)] / [1 + r (dc)] = [1 + i (fc)] / [1 + > i (dc)] Fisher says that capital is free to move anywhere across borders, as chadtap says, so any difference is real rates will be wiped out by movement of capital from one country to another.
Agree on first 2. I think 3 is uncovered interest rate parity, I see “expected” there. And 4 is interest rate parity. interest rate parity covers forward rate. International fisher basically means that real risk free rate is same in all country.
- FEE 2. Relative PPP 3. UIRP 4. IRP 5. Fischer
Answers: 1) Foreign Exchange Expectations 2) Relative PPP 3) Uncovered Interest Rate Parity 4) Interest Rate Parity - key difference from 3 is that is is “covered” by a forward contract. 5) International Fisher